Market Focus May 2020
Yield curve control in the JGB market is one thing; yield curve control in the US Treasury market is quite another. Non-residents own 13 per cent of the JGB market but 35 per cent of US Treasuries, and they sold a net US$300bn in March. The gigantic expenditures of the Federal government and the stupendous liquidity injections by the Federal Reserve have amplified inflation uncertainty and validated fears of a protracted slump in activity. Both factors are associated with a rise in the term premium. We expect the Treasury yield curve to steepen in the 2- to 10-year segment against the wishes of the authorities and the expectations of institutional investors. This could be a painful reunion with reality.
In the mid-1970s, mass unemployment coincided with a painful spike in inflation, particularly in the UK following a disastrous relaxation of credit conditions. A plunge in output and employment is neither necessary nor sufficient to deliver a weak pricing environment. Western governments have offered income guarantees with one hand but mandated a massive cut in productivity with the other. The inflation profile for the coming months is highly uncertain.
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The analysis of developments in global private sector credit markets is fundamental to our understanding of the global economic and financial outlook. However, the actions and interventions of central banks and government have become increasingly important to our economic assessment.
For several years we have maintained that the only credible resolution of the 2008 global credit crisis is a resurgence of global inflation. We take an eclectic approach to the inflation outlook, considering political and socio-economic factors alongside macroeconomic drivers. We provide the multi-dimensional appraisal of the inflation outlook that is critical to formulating a successful investment strategy, at a time when inflation complacency is rife.
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